Growing Your Business: Part 2 - Strategic Acquisitions
A journey of a thousand miles begins with a single step.
Our article Growing Your Business: Part 1 – Organic Growth outlined the strategic avenues to organic growth.
Growing a business requires a strategy, a pathway to implement, achieve and track targeted growth. The two most common avenues to business growth are discussed below:
This article will focus on some of the key aspects to consider in relation to completing a strategic acquisition.
Strategic acquisition is a strategy that potentially presents greater risk and with it greater return than an organic growth strategy.
Accordingly, this significant decision must start with the first and most important step, the right acquisition strategy. Before obtaining a valuation of a potential target, making an offer to acquire, commencing the due diligence process and negotiating the sale price, consideration must be given to the purpose of the acquisition and the best structure to achieve this. This decision alone can mitigate much of the potential risk associated with an acquisition and is therefore crucial.
Below we outline the key considerations in structuring a strategic acquisition:
Buying the Target’s Business – Unlocking the Synergies
One of the dominant purposes of a strategic acquisition of a business is to take advantage of synergies arising from the integration of two or more businesses. Depending on the specific industry, synergies generally include expected cost savings, growth opportunities, market share and other financial benefits that are gained as a result of business integration.
The acquisition of a business with notable opportunities to realise synergies supports the ability to pay a higher purchase price when compared to the business market value.
The acquisition of a business will allow the acquirer greater flexibility in negotiating with the target on the inclusion of certain assets, liabilities and any other commitments relevant to the business operations.
Buying the Target’s Equity – Beware the skeletons
The acquisition of equity (shares or units) necessarily includes all the assets, liabilities and other commitments as well as the underlying business of the target.
The structure under which a business operates will determine which equity instrument is purchased, for example, shares in a corporate entity or units in a unit trust. In some structures, an equity instrument will not exist and the acquisition of a business will be the only option, for example, businesses operated through partnerships, discretionary trusts or by sole traders.
The acquisition of equity will need to consider whether all or some of the equity is purchased and what level of ownership will be held, for example, majority, controlling, strategic or minority interests. The level of equity purchased will determine whether the acquirer receives the right to control decisions regarding the target’s business and its underlying cash flows.
An equity acquisition may expose an acquirer to potential or unrecognised claims and liabilities of a target. In these circumstances it is important that a thorough due diligence process is undertaken.
Buying the Target’s Assets
It is common that acquisitions of specific business intangible assets translate to increased earnings when these assets are integrated by the acquirer, for example, contracts with customers, contracts with suppliers, license agreements for exclusive use or distributions, and industry specific assets.
The acquisition of specific business intangible assets can provide the acquirer with an immediate income stream, be integrated into the acquirer’s supply chain, provide an opportunity for the acquirer to diversify their business operation and/or provide added value to assist in winning future tenders and contracts.
Examples of industry specific intangible assets include Real Estate rent rolls for Real Estate Agents, mortgage/loan books for Mortgage Brokers and service contracts for Facility Service Managers.
The three key considerations outlined above must be considered in conjunction with the nature, operations and industry of a target business when contemplating the appropriate structure of a strategic acquisition to drive business growth.
If you need help in identifying, understanding and approaching the acquisition process, contact either Steven Perri or Timothy Bow of our Melbourne office or alternatively click the button below to contact the corporate finance specialist nearest you.